Ethical Investment October 24 Report
Dear Investor,
I am pleased to announce the release of our October 2024 Monthly Report for our Funds. The ELMRI ANZ Conviction Fund increased by 0.9% and the ELM Responsible Investments Global Fund increased by 3.1%.
Economic and Market Overview
Global equity markets experienced mixed results in October, reflecting geopolitical tensions and varied economic data. In the U.S., the S&P 500 Index declined 0.9% for the month, though job growth remained strong with 254,000 jobs added in September. Inflation continued its downward trend, falling to 2.4%, its lowest level in over two years. In Europe, indices such as the DAX and FTSE 100 registered losses of 1.3% and 1.4%, respectively, influenced by economic uncertainty and further interest rate adjustments by the European Central Bank.
In Australia, the S&P/ASX 300 Index fell 1.3% in October amid stabilising unemployment at 4.1% and a decline in annual CPI inflation to 2.1%. The Reserve Bank of Australia held interest rates steady, reflecting a more subdued inflationary environment.
eVTOL Industry Update
The electric vertical take-off and landing (eVTOL) sector represents a vital step in decarbonising air travel, promising quieter, more efficient, and sustainable urban mobility. However, unlike electric automobiles, the eVTOL industry is still in its infancy. Developing and scaling this transformative technology requires significant capital investment, presenting high risks alongside the potential for high rewards. For investors, this means carefully considering portfolio weighting in this sector to balance risk exposure, rather than avoiding it entirely.
Players and Industry Performance
The eVTOL industry has several key players, including Joby Aviation, Lilium, Archer Aviation, and Vertical Aerospace, each with unique approaches and challenges. Among these, Joby Aviation has emerged as a leader, advancing rapidly toward commercialisation thanks to its financial stability and practical design strategy. In contrast, Lilium has struggled, its ambitious design and financial mismanagement leading to insolvency proceedings last month. Meanwhile, Archer Aviation and Vertical Aerospace have made notable strides, each demonstrating progress that highlights the broader potential of the eVTOL market despite its inherent risks.
Joby Aviation’s Steady Progress
Joby Aviation stands out due to its strong financial position, bolstered by a $500 million investment from Toyota during the month. This funding will enable Joby to pursue a streamlined development process, focusing on a simple, scalable design with a small number of large rotors. The company has successfully completed piloted test flights and made significant headway in securing Federal Aviation Administration (FAA) approvals. Joby’s disciplined execution and partnerships position it as a frontrunner in the eVTOL market.
In addition to Toyota, Joby Aviation also has a strategic partnership with Uber where in December 2020, they acquired Uber's aerial ridesharing division, Uber Elevate. Joby also received an additional $75 million investment from Uber, bringing their total investment in Joby to $125 million. This collaboration integrates Joby's air taxi services into Uber's app, enabling seamless multimodal journeys for Uber users.
As investors, we hold a small weight in Joby Aviation. This reflects our recognition of the importance of this innovative sector, as well as the financial risks and investment potential it presents. Our allocation underscores the role of such groundbreaking technologies in a diversified portfolio, balancing exposure to transformative industries with prudent risk management.
Lilium’s Challenges
In stark contrast, Lilium’s journey has been fraught with difficulties. Its ambitious design, featuring 30 ducted fans integrated into its wings, has introduced technical complexity, driving up costs and delaying progress. Efforts to secure a €100 million loan from Germany’s state-owned KfW bank failed in October, partly due to political opposition, leading to a cash crisis and insolvency proceedings.
Archer Aviation and Vertical Aerospace: Notable Progress
Archer Aviation has made significant regulatory and commercial advancements over the past year. In May 2024, the FAA issued final airworthiness criteria for its Midnight aircraft, marking a major step toward certification. Archer has also begun constructing piloted prototypes for testing and secured a partnership with Soracle, a joint venture between Japan Airlines and Sumitomo, to potentially supply up to $500 million worth of aircraft for air taxi services.
Vertical Aerospace has focused on flight testing and regulatory achievements, completing the first phase of its piloted flight test program for the VX4 prototype. Additionally, it became the first eVTOL manufacturer to receive Design Organisation Approval (DOA) from the UK Civil Aviation Authority, an essential milestone for certification. Despite these achievements, Vertical faced financial pressures, recently securing $50 million in new funding through a deal that granted a US distressed debt investor a controlling stake.
Looking Ahead
The contrasting fortunes of Joby, Lilium, Archer, and Vertical Aerospace underscore the complexity of the eVTOL sector. While Joby continues to lead with its practical design and solid financial backing, Archer and Vertical highlight the importance of strategic partnerships and regulatory progress in navigating this challenging industry. Lilium’s setbacks serve as a cautionary tale about balancing ambition with operational discipline. For investors, the eVTOL space offers exciting opportunities but requires robust risk management and a considered portfolio allocation.
AI Theme Exposure Across the Portfolio
ELM Responsible Investments continues to benefit from the rapid advancements in artificial intelligence (AI), a key driver of innovation across various industries. Our AI-related holdings span core compute technologies, infrastructure, software, and real-world applications.
AI Compute: Investments in Nvidia and ASML provide exposure to the foundational technologies underpinning AI adoption. Nvidia remains integral to AI workloads with its GPUs, while ASML’s advanced lithography systems are critical to producing the semiconductors driving AI innovation.
AI Infrastructure: Companies like Microsoft, Next DC, Infratil, and Brookfield support the infrastructure necessary for AI growth. Microsoft leads in cloud-based AI solutions, while Next DC and Infratil address the increasing demand for data centres and energy capacity. Brookfield’s renewable energy expertise aligns with sustainable AI infrastructure needs.
AI Software: ServiceNow, Xero, and Seek represent our software-focused investments that leverage AI to enhance productivity and efficiency. ServiceNow’s AI-powered Now Assist tool exemplifies the growing role of AI in enterprise software, while Xero and Seek integrate AI into their platforms to improve operational effectiveness.
Real-World AI Applications: Companies like Tesla and Block exemplify real-world AI implementation. Tesla’s advancements in autonomous driving and Block’s AI-driven financial solutions highlight the transformative potential of AI in traditional industries. While these businesses are not yet fully valued as AI leaders, they present significant long-term opportunities.
These investments position our portfolio to capture value across different stages of the AI ecosystem while aligning with our commitment to sustainability and innovation.
ELMRI Global Fund Update
The Global Fund continues to deliver strong returns, with gains of 13% so far in November. Short-term performance remains robust, and since-inception results are steadily improving. Key contributors to the fund’s performance include Tesla, ServiceNow, and Intuitive Surgical.
Tesla: Tesla reported an 8% year-over-year revenue increase in Q3, driven by higher full-self-driving (FSD) revenue recognition and strong performance in its energy storage segment. Gross margins improved to 19.8%, supported by cost efficiencies and scaling across product lines. Tesla also progressed in autonomous driving technology and robotics, with plans for its “Cybercab” launch in 2026.
ServiceNow: ServiceNow posted a 22% year-over-year revenue increase in Q3, supported by strong subscription growth and higher operating margins of 31.1%. Its Generative AI workflow tool, Now Assist, has seen rapid adoption, contributing to long-term contract value growth.
Intuitive Surgical: Intuitive Surgical recorded a 17% revenue increase in Q3, reflecting higher procedure volumes and system placements. Gross margins rose to 68.7%, supported by operational efficiency gains. The company remains well-positioned to expand its Da Vinci surgical system in 2025.Our Views on AI Investment
ELM ANZ Conviction Fund Update
The ANZ Conviction Fund has surpassed the five-year mark and continues to outperform the traditional benchmark by focusing on investments in the most innovative and impactful companies. November has seen continued strong performance, supported by key holdings in the portfolio.
ResMed: ResMed reported an 11% year-over-year revenue increase for Q1 FY25, with strong demand for its AS10 and AS11 devices. Gross margins improved to 59.2%, aided by cost efficiencies and higher average selling prices. ResMed remains a leader in respiratory health, supported by its operational excellence and market positioning.
The US Election and Its Implications for Sustainable Investing
In our recent commentary featured in the Australian Financial Review, we emphasised that while the U.S. election has introduced some uncertainty around renewable energy policies, the broader sustainability trends remain intact. Concerns about potential changes to green energy incentives and ESG-focused investments reflect the shifting political landscape, but they do not undermine the long-term drivers of decarbonisation and resilience. For example, renewable energy is already the lowest-cost energy provider in some markets.
We firmly believe sustainability is not tied to political cycles but is instead driven by the economic and environmental imperatives of transitioning to cleaner energy and building resilience. ELM’s consistent performance—evident in the ANZ Fund’s five-year outperformance and the Global Fund’s strong year-to-date returns—demonstrates that investing in impactful companies can achieve both financial success and long-term positive change.
Conclusion
Both the ELM Global Fund and the ANZ Conviction Fund are well-positioned to deliver long-term returns while capitalising on the transformative opportunities presented by AI and sustainability. By adhering to a disciplined investment strategy and focusing on companies driving innovation and positive change, ELM Responsible Investments continues to create value for investors while supporting a sustainable future.
If you wish to discuss any aspect of this report in greater detail, please do not hesitate to reach out. I would be more than happy to arrange a meeting at your convenience. Those interested in investing with us can explore our investment portal and review our fund documentation by clicking the "Invest Now" buttons provided below.
Thank you for your ongoing interest and support.
Kind regards,
Jai Mirchandani
Founder, CIO and Portfolio Manager
ELM Responsible Investments
ELM Responsible Investments Global Fund
ELMRI ANZ Conviction Fund
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.
This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.
ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.
Past performance is for illustrative purposes only and is not indicative of future performance.